After a year and a half of build up, the city of San Jose has pegged a possible range for a new developer fee to fund badly needed affordable housing.

The potential price tag for developers is likely somewhere between $17-$28 per square foot for new rental units. That is unless policymakers settle for a lower fee — as they did in Mountain View last year at $10 per square foot — to avoid any chilling effect on development during the current strong economic cycle in Silicon Valley.

For the next step, the city has scheduled “stakeholder meetings” during August and plans to broach the topic at a Sept. 11 meeting of the Housing and Community Development Commission.

As I recently reported, San Jose’s consideration of a residential impact fee comes after deep cuts to Silicon Valley affordable housing coffers. Budget woes have been compounded by a legal blow to the city’s old system of inclusionary zoning, under which developers paid an in-lieu fee for projects that lacked affordable, below market-rate units.

In San Jose, the new nexus study describes the rationale for impact fees as an answer to unaffordable housing:

“New market-rate apartments result in new households in San Jose that consume goods and services, which in turn generate the need for increased affordable housing.”

That logic is contested by some in the development community. Robert Freed, the CEO of SummerHill Homes, has argued that Silicon Valley’s soaring costs of living are a function of broader economic forces.

He told me earlier this year that he would prefer local cities to acknowledge that impact fees would function like a tax, and that broader funding mechanisms should be on the table.

Behind the numbers

San Jose’s 77-page nexus report and 34-page supplement — which you can read right here— are packed with detailed housing market projections, income data for local residents and calculations for developer costs.

Data lag time aside, another inherent difficulty in this type of analysis lies in forecasting how the housing market will do in the future, especially in a region known for boom and bust economic cycles. Well-paid tech talent won’t be going away during the region’s current boom. But future variables must be taken into account, including high land costs and how a ( very limited) number of new housing units coming online might impact rental rates.

After addressing all those moving parts, city consultants at the firm Keyser Marston Associates determined that the average apartment “affordability gap” — or the amount of revenue that could be recouped by a new impact fee — is about $28,000 per unit, or $28 per square foot.

The report also illustrates demand for affordable housing by using state wage data that shows large chunks of the city’s workforce making $20,000-$50,000 a year in fields like food service, healthcare, education, maintenance, office support and transportation.

However, the new study notes that the estimated affordability gap is a maximum. The supplemental city report models the potential impact of a lower $17 per-square-foot housing fee, which would account for about 4.5 percent of average developer costs on new residential projects — likely adding tens or hundreds of thousands of dollars to new projects.

Consultants completing the report relied on a model using a $2,673 per month, 990-square-foot apartment. Also factored in was a presumed 6 percent developer profit, referred to as a return on cost, which the report notes was fairly standard in Silicon Valley as of 2013.

If the $17-per-foot number sounds familiar, it should. San Jose’s previous in-lieu fee was $17, though that program has been put on hold since a legal decision questioning cities’ authority to enact such laws.

“We could be sued for any action the council takes,” Corsiglia said. “We did look at what all the other potential fees were, or taxes, and how much money we thought they would create. This was the one that we felt was doable.”

Penciling out

While many developers, public officials and Silicon Valley residents acknowledge that the region needs more housing, the bigger financial picture on impact fees is complex.

Though a hypothetical $17-per-square-foot fee would account for less than 5 percent of average development costs, developers already pay other permitting fees and taxes.

The total for fees and taxes would likely rise to about $40 per square foot on a standard apartment, or about 10.4 percent of the total cost of a unit that costs developers $380 per square foot to build. For high-rise apartments within the city’s existing downtown high-rise incentive zone, developers are looking at $31 in fees and taxes, or about 6 percent of total development costs of around $510 per square foot.

San Jose’s existing fees are especially important to take into account when comparing how the city stacks up to other Silicon Valley locales with housing impact fees on the books, since competition is usually cited as a primary barrier for new fees.

The South Bay city has fairly high existing construction taxes (see the chart in this story for a breakdown), but other cities already have impact fees on the books. Fremont’s is more than $18 per square foot on rental housing, Mountain View’s is $10 and Sunnyvale is evaluating a new fee.

As I have reported, cost differentials also come into play based on the type of housing. Though academics and urban planners urge dense, mixed-use housing to facilitate more efficient development, there are cost tradeoffs.

The new San Jose report found that standard stacked or wrap apartments are valued at about $375,000 with developer costs between $317,000-$319,000. Rental units in mixed-use developments are costlier; though they are valued at an average $397,000 per unit, they end up costing developers about $358,400.